In an attempt to combat money laundering and other illegal/illicit activities (via shell corporations, limited liability companies and other entities), Congress enacted the Corporate Transparency Act (CTA) as part of the Anti-Money Laundering Act of 2020. The CTA requires domestic and foreign “reporting companies” to report identifying information concerning “beneficial owners,” generally an entity’s major equity owners, managers, directors, and senior officers to the Financial Crimes Enforcement Network (FinCEN). 

The CTA’s reporting requirements target smaller, less regulated entities that may not be subject to any other/similar reporting requirements. Many states do not currently require any beneficial ownership reporting upon formation. Failure to adhere to the requirements of the CTA can result in civil and criminal penalties, including significant fines and imprisonment.

FinCEN has not yet released final regulations or a proposed effective date, but several senators and other lawmakers are asking for this to happen sooner rather than later.

Proposed Reporting Requirements

Reporting companies must report identifying information of beneficial owners and company applicants to FinCEN.  A “reporting company” is a corporation, limited liability company or “other similar entity” that does not fall under one of the exceptions. The Proposed Regulations (“Proposed Regs”) clarify that “other similar entities” are entities created by a filing with a secretary of state or similar registry, including limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships. Entities formed in foreign countries that are registered to do business in the United States are also considered reporting companies.

The CTA limits companies required to report with a long list of exempt entities, including but not limited to: 

• Certain publicly-traded entities;
• Banks;
• Entities that filed a tax return showing revenue in excess of US$5 million per year, have over 20 full-time employees and have physical operations in the United States;
• Governmental entities;
• Entities in which the ownership interests are owned, or controlled (directly or indirectly) by certain other types of exempt entities;
• Inactive entities that are domestically owned entities over one year old that do not engage in an active business, hold any type of asset, and have not changed ownership or sent or received funds over US$1,000 in the preceding 12-month period; and
• Pooled investment vehicles being operated or advised by certain persons.

A “beneficial owner” is an individual who, directly or indirectly, exercises substantial control over an entity or controls or owns 25% or more of the ownership of the entity. The definition does not include minor children (parental/guardian information must be reported instead), creditors, and employees who only have control or economic benefits solely as the status of an employee.

The Proposed Regs provide that certain senior officers, persons with authority of appointment or removal of officers or dominant majority of the board and persons that make important decisions or have substantial influence over those decisions, are also considered beneficial owners. “Senior officers” currently include the president, secretary, treasurer, CFO, CEO, COO, general counsel, or any other officer (regardless of title) who performs similar functions.

A “company applicant” is the individual that files an application to form a domestic reporting company or register a foreign reporting company. The Proposed Regs also include any individual who directs or controls the filing of such a document by another person (i.e., there can be multiple company applicants). From a practical standpoint, in many instances, the person who directs or controls the filing of such a document will likely also be considered a beneficial owner.

Reported Information: Substance and Storage

Under the Proposed Regs, a reporting company must report basic information about the company, including name, “doing business as” names, address, jurisdiction of formation or registration, and a unique identification number (e.g., Taxpayer/Employer Identification Number, Dun & Bradstreet number, etc.). In addition, a reporting company must also report certain identifying information about each beneficial owner and company applicant, including their full legal name, date of birth, residential or business street address and an acceptable unique identifying number (e.g., an unexpired passport or driver’s license – and an image of the document). For individual beneficial owners, the address for tax residency purposes should be reported. For applicants that provide a business service as a corporate or formation agent (including law firms), the company should report the company applicant’s business address, rather than the actual filer’s address. In lieu of providing the foregoing information, a reporting company may provide a FinCEN identifier for a beneficial owner or company applicant.

Under the Proposed Regs, domestic reporting companies created, or foreign reporting companies registered to do business in the United States, before the effective date of the final regulations would have one year to file the initial report with FinCEN. Also, under the Proposed Regs, domestic reporting companies created, or foreign reporting companies registered to do business in the United States for the first time, on or after the effective date of the final regulations will be required to file their initial report with FinCEN within fourteen (yes, 14) calendar days after the formation filing or registration filing.

When reported information becomes inaccurate, the CTA requires the information to be corrected/updated. The Proposed Regs suggest a 30-day time period for most updates.  

Section 6403 of the CTA requires FinCEN to maintain the information that it collects under the CTA in a confidential, secure, and nonpublic database. However, FinCEN may disclose the information to certain government agencies, domestic and foreign, as provided in the CTA, and to financial institutions to assist them in meeting their customer due diligence requirements. 

Access to Data

Non-compliance with reporting requirements can result in civil and criminal penalties, and after disclosure of the beneficial ownership information to FinCEN, such information may be disclosed by FinCEN to certain governmental entities to support law enforcement activities. Using appropriate procedures, federal agencies may request (and receive) access to the data directly through FinCEN. However, state and local law enforcement, must have a court order to receive access. The IRS will also have access to the database.

Conclusion

In short, there are likely tens of millions of legal entities in the United States that may need to report CTA required info. Although there are several exceptions from the definition of reporting companies, many businesses, including startups, early stage, and emerging growth companies, may also have this added burden along with the reporting costs associated with complying with the CTA.

As noted, FinCEN has not alluded to when the final regulations will be released but is indicating a commitment to identifying the soonest possible effective date after publication on same. Future Proposed Regulations are expected to contain more details including reporting protocols and relevant forms